Royal Commission: Gaining better visibility into conduct blind spots

In the Interim Report of the Royal Commission into Misconduct in Banking, Superannuation and Financial Services, Commissioner Hayne said “…every piece of conduct that has been contrary to law is a case where the existing governance structures and practices of the entity and its risk management practices have not prevented that unlawful conduct[1] . He asked “What are banks doing to meet the danger of conduct risk?

While ‘prevention’ should be understood in the context of risk mitigation, Hayne’s question pits corporate governance practices against conduct outcomes, in particular ‘misconduct’ (defined as encompassing conduct falling below community standards and expectations). To predict and prevent problems from happening, rather than responding to them when they happen, Hayne’s focused on implementing better corporate governance practices to render conduct blind spots visible.

Leaders need to reflect on the causative links between governance practices and misconduct

Useful questions include:

  • Were we surprised by decisions taken within the entity that did not reflect our core purpose or values and led to poor customer outcomes?
  • When were we last informed of a new issue in a timely manner to understand its root cause and debate options for preventing or containing the downside risk?
  • Is our main focus issue resolution and remediation?
What governance changes might better predict and prevent misconduct?

Corporate governance is generally defined as: The framework of rules, relationships, systems and processes within, and by which, authority is exercised and controlled within corporations. It encompasses mechanisms by which companies, and those in control are held to account.[2]

Governance has both structural and behavioural dimensions. Increased insight into weaknesses across both dimensions can help change governance practices to address conduct blind spots and so predict and prevent misconduct.

Much misconduct is caused by how directors and senior leaders behave within the governance structures.

As former US Federal Reserve Chair Alan Greenspan commented post GFC: Rules cannot substitute for character.[3] And the G30 noted: Most studies agree that it is behaviours, much more than frameworks and structures that matter[4].

The opportunity for behavioural change in decision-making

Decision-making is essential to governance practice and critical to conduct. What and how you decide, defines how you behave and produce outcomes, and how you are perceived. It is a key driver of reputation and trust.

Through its decisions, an organisation either demonstrates  consistency with its strategic objectives balancing the risks and interests of all stakeholders –or it doesn’t. Consistent and balanced decision-making promotes sustainable performance and, done well, can maximise social welfare.

Since 2010 the central bank of the Netherlands[5] (DNB) does supervisory assessments of the behaviours and culture of financial institutions as predicting and driving future performance. Early intervention aims to prevent future problems. Drawing on the DNB supervisory model, the indicators below provide food for thought on what might be changed.

 

Structural decision-making factors Practice considerations Behavioural decision-making factors Practice considerations
Role clarity Board and committee understand their roles and the extent that it is a shared understanding. Impeding group patterns Group-think, straining for consensus, information-sharing biases, conflicts of interest.
Meaningful involvement of all relevant people and functions Counter-balancing views, and involvement of key control functions. Quality of challenge Extent of deliberate enabling structures, a facilitative leadership style, dissenting views heard and debated.
Quality of information Extent information deepens understanding of issues, enhances constructive challenge, addresses risks, explains the nature and likelihood of possible positive and negative outcomes.

While other corporate governance elements can be examined for conduct blind spots, rather than waiting for the negative outcomes of inconsistent and unbalanced decisions, organisations can and should, get on the front foot with planned decision-making interventions that serve to predict and prevent misconduct.  Governance practice designed in this way can provide organisations with the confidence to sustainably deliver to both customer and community standards and expectations.

Author: Deborah Latimer FGIA, GAICD–Partner Deloitte Governance, Regulatory, and Conduct. Deborah is Co-lead of Deloitte Australia’s Corporate Governance practice and lead of its Compliance practice.

For more commentary from Deloitte on the Royal Commission, please click here.

[1] At page 302
[2] ASX Corporate Governance Council, Corporate Governance Principles and Recommendations 2014, Third edition, ASX.
[3] Address to the Wharton School, University of Pennsylvania, 15 May 2015
[4] Group of Thirty, 2012, p13
[5] Supervision of Behaviour and Culture: Foundations, practice and future development, 2015, De NederlandscheBank, see Chapter 5 ‘Decision-making’.


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